Collateralized mortgage obligation
What are collateralised mortgage obligations?
Collateralised mortgage obligations (CMOs) are intricate debt securities that reposition the payments of principal and interest from a collateral pool and moves them into different sorts of securities, to meet the investor's needs.
Where have you heard about collateralised mortgage obligations?
Created by investment banks Salomon Brothers and First Boston in 1983, these complex debt securities involved many different mortgages. They can be controversial, and the use of these securities is widely thought to be a contributing factor in the 2008 financial crisis.
What you need to know about collateralised mortgage obligations.
A CMO is not a debt owned by an institution. It's made up of several tranches and these tranches are organised by there risk profiles. CMOs are responsive to changes in economic conditions, as these conditions will obviously effect a homeowner’s ability to make their mortgage payments. The CMO investor’s profit is based on whether mortgage holders make their payments on time. If a small minority of home owners can't pay their mortgage but the majority can, then the investor will recoup his principal. However if many home owners do not pay their mortgage the CMO loses money and is unable to pay the investor.
Find out more about collateralised mortgage obligations.
Learn more about collateralised mortgage obligations by reading about tranches.